Senate Banking Committee hears testimony on consequences of government default

The Senate Committee on Banking, Housing and Urban Affairs held a hearing on Thursday to examine the consequences of default on financial stability and economic growth, during which the committee heard testimony from industry groups.

Representatives from a number of organizations, including the American Bankers Association, Securities Industry and Financial Markets Association, National Association of Realtors and Investment Company Institute testified before the committee.

ABA President and CEO Frank Keating said the country would lose the world’s trust if Congress failed to raise the debt ceiling before the Oct. 17 deadline, Credit Union Times reports.

“Since May, the Treasury has used extraordinary measures to keep us from hitting the debt limit. We have been lucky to avoid it thus far, but time is up,” Keating said, according to Credit Union Times. “With the U.S. economy and our nation’s honor on the brink, our leaders must — in the spirit of patriotic compromise — do what it takes to make a deal. If confidence is lost in our country’s willingness to pay its bills on time, we will have lost something that may be impossible to regain — the world’s trust.”

SIFMA President Kenneth E. Bentsen, Jr. said the important role of the U.S. Treasury make it likely that default would have a negative impact on the economy and financial markets.

“Indeed market observers have already noted the effects of the current uncertainty regarding the public debt limit, including fairly dramatic pricing effects on the short end of the Treasury market and re-purchase agreements or repos,” Bentsen said. “While we firmly believe that the time is long overdue for the Administration and the Congress to come together and develop long-term solutions to our very real fiscal challenges, voluntarily defaulting on the nation’s obligations should not be an option for policymakers to consider.”

NAR President Gary Thomas warned of similar consequences, adding that default could be catastrophic for the still precarious housing recovery.

“A default would be devastating for homeowners whose largest asset would lose value and equity, for home buyers who would see dramatic increases in interest rates and tighter credit standards, and for entire communities that are still grappling from the impact of the financial meltdown,” Thomas, the broker-owner of Evergreen Realty, in Villa Park, Calif., said. “As the leading advocate for housing issues, NAR is committed to protecting the value of homeownership from the avoidable and substantial harm that would be inflicted by Congress’s inaction to avert a default.”

Committee Chairman Tim Johnson said he is not in favor of making the U.S. into a “deadbeat nation,” which would ultimately result from Congress’ failure to raise the debt ceiling.

“It is time to stop playing this foolish game of chicken with our economic recovery, and it is time for Congress to focus on addressing the real problems our constituents sent us to Washington to solve,” Johnson said.